The Bank of Spain warns about the economic impacts that the fight against climate change may have on low incomes. Households with fewer resources will have more difficulty coping with the ecological transition. Carbon rights are already making energy more expensive. Green taxes also suppose a greater effort for the most humble families. The suppression of coal entails an increase in the cost of gas and, therefore, of electricity. Equipment and vehicle changes are more unaffordable. Higher inflation is already occurring due to the bottlenecks caused by the massive demand for raw materials and products necessary to meet climate commitments, affecting the pockets of citizens. And those with little training will be less able to find a job in the intense recomposition that will take place between companies and sectors as progress is made towards a more sustainable growth model.
In general, all this implies changes in consumption patterns that are more complicated to tackle for those who have less. Also higher prices, at least in the short term, which affect low incomes more, whose consumption basket is more exposed. Even the investments needed to achieve climate targets, which will have to be massive, could lead to higher inflation that hits the poor hardest, the watchdog admits. Although there is much uncertainty about what economic effects this process will end up having, the Bank of Spain recommends that the policies in this regard be carefully evaluated and that these incomes be compensated for the sacrifices they will have to make. These aids should be very focused, temporary and conditional on income to avoid an excessive break in public accounts, he stresses. In a context in which the yellow vests had already jumped and in which Spain has had protests from the countryside or transport, the supervisor’s analysis warns that the green transition will be social or it will not be. These conclusions are included in a chapter of the annual report that the institution has advanced this Wednesday.
In the opinion of the Bank of Spain, these compensations for low incomes must be carried out in such a way that they help support incomes, but do not encourage consumption patterns to remain the same. Although the bank does not specify it, a negative example in this sense would be to subsidize fuel to continue using the car in the same way. And one that would be positive: in the United Kingdom, instead of lowering the price of electricity with tax cuts, help has been given through municipal taxes to all families, so that, although they receive the same monetary aid , continue to have high electricity prices and, therefore, an incentive to lower their electricity consumption. In other words, the design must facilitate the change in consumption pattern, emphasizes the supervisory body.
Studies by the Bank of Spain show that the percentage of spending in sectors with high emissions falls with income. Or put another way: low incomes have a shopping basket in which there are more products and services with higher carbon production. Consequently, they would suffer more measures such as an increase in green taxation for these products.
“The foreseeable increase in the prices of the most polluting goods and services will probably have a more pronounced impact on households with a lower income level, with a head of family around 40 years of age, those who reside in rural areas, are not homeowners, have a lower educational level or present a greater number of members”, says the document. That is, families will be affected very unevenly.
He knows in depth all the sides of the coin.
“Apart from considerations of equity, the need to deploy compensatory measures would also be justified in pursuit of achieving sufficient and essential social consensus to carry out the profound process of structural transformation that the economy and society need to undertake in the coming years to face the important climatic challenges”, he warns. For example, the Bank of Spain points out that investments in solar and wind plants do not necessarily have an impact on local unemployment in those places where they are placed.
Important sectoral differences
There will also be companies that are more vulnerable due to the increase in the cost of inputs, due to the intensity of energy use or due to changes in the consumption pattern, the bank points out. Financial entities should review their portfolios to see the exposure to these. And these companies can also end up suffering from a credit crunch. By sectors, manufacturing, agriculture and energy supply account for 25% of the economy and 70% of emissions. Construction, hospitality and commerce also have a significant carbon footprint due to their weight in the economy and their relationships with other sectors.
According to surveys handled by the supervisor, SMEs are less well prepared. And the greatest risks that companies perceive due to the ecological transition are inflationary pressures and greater administrative burdens due to information obligations.
Just as the blow will be asymmetric by income, it will also be asymmetric by region. According to scientific forecasts, the south of the peninsula will experience less rainfall and the southeast, greater water stress. The Bank of Spain recalls that there is a consensus among scientists that if the emissions path is not corrected, there will be a much greater economic cost due to events such as droughts, fires, floods, storms, illnesses and sick leave. In a wide horizon the consequences are very difficult to determine. Its economic impact is highly uncertain. The models have proved insufficient, acknowledges the bank. To the point that the same study can encrypt it in a loss from 0.7 points of global GDP to 62 points. Very innovative policies are being applied. For this reason, the institution points out that it is essential to have quality information and to evaluate it, especially when it comes to a subject in which there are no decades of experience, as could happen with the labor market or pensions.
Graduation to avoid higher costs
Another major risk is that not enough is done to combat climate change and the ecological transition has to be accelerated later. This could end up generating even higher economic transition costs. Hence, the Spanish supervisory body insists on gradualism. In fact, the bank recalls that reaching the goals set for 2030 would already mean an additional effort “that should not be underestimated”. Despite being far from the goals of 2030 and 2050, Spain has been reducing its gas emissions since 2008, placing them 13% below 1990. The increase in renewables, the decrease in household emissions have contributed to the reduction and changes in the sectoral structure of the economy with more services and less intensity in the use of energy. The ambitious goal for eight years from now is to leave it 23% lower than in 1990.
Taxes for polluting activities
The Bank of Spain concludes that green taxes are the best instrument to penalize and redirect the externalities of economic activity and, incidentally, collect more. With this collection, public accounts can be cleaned up. In Spain, there is much less income from fuel taxation, the agency points out. But they can also be used to compensate lower income groups for the greater impact they suffer. Or to reduce some tax figures that distort economic activity. The white paper on tax reform has an entire chapter with proposals and devotes a lot of space to the need to use part of the resources obtained to compensate the losers. In any case, the design of the environmental tax must improve a lot, stresses the annual report, which recommends conditioning any aid to the level of income. In this sense, the move plan to subsidize electric vehicles would not be well thought out because higher incomes and municipalities with more charging points have benefited more from it.
Southern countries are at greater risk of rising temperatures and sea levels. However, the economic impact of the transition for Spain would be more or less similar to that of neighboring countries, says the supervisor. When comparing, for example, with Germany, Spain has manufacturing that is less prepared for the transition. However, the Spanish have many more renewables than the Germans. The Bank of Spain does not provide closed numbers on how much the green transition could affect the economy because they believe that many factors escape it to weigh them correctly, such as the ability to substitute some products and technologies for others.
Policies to combat climate change must be coordinated globally to work, says the bank. Less developed countries should be provided with the necessary technologies and support. It should also be taken into account that in a low growth stage more pollution is produced, while a developed economy has more services that emit less carbon. If there is no collaboration between the countries, then it would be necessary to establish border adjustments such as those already proposed by the European Commission, that is, charging imports the same climate costs that are imposed on European companies. In this way, the loss of competitiveness would be avoided, says the supervisor.